Problem_Set__6 - Assuming this debt is held in perpetuity...

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BusM 401 Problem Set #6 Capital Structure Instructions: Complete all questions. This problem set is worth 10 points. Problems sets are graded on effort and completeness; you must show your work in order to get full credit. Short answers (“checkpoints”) are available for some questions on Blackboard so that you can check your answers. Full solutions are available on Blackboard after the problem set is due. (Some full answers are found in the back of Higgins; it’s best not to look at these until you have tried your best to answer the question.) 1. Haverhill Corporation has net income of $10 million per year on net sales of $100 million per year. It currently has no long-term debt, but is considering a debt issue of $5 million. The interest rate on the debt would be 8%. Haverhill currently faces an effective tax rate of 35%.
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Unformatted text preview: Assuming this debt is held in perpetuity, what would be the total value of the tax shield to Haverhill if it goes through with the debt issuance? 2. Why does the debt overhang problem make it difficult for firms facing financial distress to finance projects with new equity? 3. Do Higgins Chapter 6, #5. 4. Do Higgins, Chapter 6, #14. Do only parts a, b, c, f, g. (Studying past annual reports, as suggested in the problem, might be useful for part f, if you want to assess the volatility of Avon’s cash flow.) 5. Do Higgins, Chapter 6, #16, but do the calculations for fiscal year end 2008 . Do Net Income/Interest Expense, Total Liabilities/Total Assets, and Long-term Debt/Equity. You do not need to use the Market Insight website. You can calculate the information from financial sites such as Yahoo. 2...
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This note was uploaded on 02/22/2012 for the course BUS M 401 taught by Professor Toddmitton during the Winter '10 term at BYU.

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Problem_Set__6 - Assuming this debt is held in perpetuity...

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